The List Lost or Technology Taken

Everyone recognizes that protecting valuable
business assets is an integral part of succeeding in business and of business succession.
Most business owners would find it foolish not to purchase insurance for tangible assets
such as a building or equipment. However, what about a businesss intangible
assets, like a client or customer base, or some in-house technology or know-how?

Protecting a businesss customer lists or technical
information is an essential part of preserving the businesss valuable assets, both
for the present and the future. This is particularly true when it comes time for a
business to be transferred, either by sale or by succession to a new generation of owners.
Without such protection, there is no guarantee that such assets will be there and
available to the new owners.

Last time we talked about some consequences of not
protecting a lease. In this issue, the second in a series of insightful newsletters
on business succession, the focus is on the loss or unauthorized use of an
important asset, like a client list or proprietary know-how.

Your Lists or Know-How are Valuable

If you sell hardware or clothing, customer lists may not be of
particular value, but to many who provide services (e.g., consulting) or specialized
products (e.g., rare paintings), the list of who wants such services or products can be of
great value.

Likewise, your business may be built upon technical knowledge
or experience that gives you an advantage over your competitors.

What if Marvin Cornwhacker, your valued assistant with 10 years
of service with your firm, decides to leave and establish a competing business?
Furthermore, what if Marvin decides to solicit your best customers or to employ the same
knowledge or expertise he developed while working for you?

What if he has been the contact person and provided most of the
services to your customers. Will they follow Marvin? Maybe. Many will remember that Marvin
was their principal contact and that they relied on him and got to know him.

Or suppose that while working for you, Marvin
acquires specialized skills or technical information that only you have. Marvins
ability to go into business and use that information or those skills can be devastating to
your business.

Protection For Your Lists or Know-How

Can you, the principal, prevent Marvin from competing? Yes, but
you need to act well before Marvin is ready to leave, maybe even before you hire a Marvin.
The protection you need for your list of customers is a "Covenant Not to
Compete." In plain English, this is a promise by Marvin not to compete with you after
he leaves your firm.

A covenant not to compete may also be effective, especially
when used in conjunction with other means, to protect trade secrets, know-how, and other
types of confidential information.

Well, okay, if there can be such a promise, why not have
Marvin make the promise effective for the rest of his life or for any area in the world?
That way, Marvin can only compete on the Moon and after he is dead (not much of a threat).

Is this fair? Perhaps yes, from your perspective, but its
hardly fair to Marvin and those dependent on him for the next several decades. The point
is, Covenants Not to Compete must be reasonable in time and area so that Marvin does not
become an indentured servant or ward of the state.

All levity aside, protection of your client or
customer base  your list  can be critical. Do you want the hypothetical Marvin
Cornwhacker to "whack" your business should he leave?

Foresight is Better Than Hindsight

Many small and medium-sized businesses give little
consideration to what happens if a key employee or associate leaves and decides to
compete. If the concerns are addressed as employees are hired or promoted, reasonable
agreements can be secured that protect the customer base or technical information you
worked years to develop. An employee, associate, manager, partner or shareholder can be
prohibited from competing for a reasonable period of time (several years) in a reasonable
area (the one your business is active in).

Not all businesses need Covenants Not to Compete,
but if you or your clients need or deserve such protection, it needs to be considered in
advance. If you wait until Marvin Cornwhacker is ready to leave and then ask him to sign
such a promise not to compete, Good Luck! If you think Marvin will sign an agreement at
that time, then you have no problem believing statements like "The check is in the
mail" or "I would never lie to you." Even if he signed an agreement at that
time, it probably would not be enforceable anyway for lack of consideration.

If you are a tax professional and would like more information about the subjects covered in this newsletter or any other tax and business matter, please call the Tax & Business Professionals, Inc. at (800)-553-6613, e-mail us at
, or visit our web site at http://www.tax-business.com.

For a full range of business law and tax-related services, call the law firm of Newland & Associates at (703) 330-0000.

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